Lagarde: IMF Warns of threat of deflation

According to Christine Lagarde, the managing director of the International Monetary Fund, the financial crisis is not over and the threat is not what people might expect. The peril comes from the possibility of deflation and its capability of doing serious damage to the global economy. The president of Chicago Fed, Charles Evans, agrees. 

Lagarde stated that inflation is lower than our central banks are aiming for, which puts us at a higher risk for deflation. This could thwart the current recovery trends that are being seen in the global economy. One telling statement she made at the National Press Club was, “If inflation is the genie, then deflation is the ogre that must be fought decisively.”This comes at a time when none of the big policy makers and central banks are mentioning deflation, particularly as a threat. Nonetheless, it is no secret that low inflation in wealthy countries can lead to economic suffering.While we are seeing a decrease in unemployment rates in countries like the United Kingdom and the United States, slow inflation would let the central banks play loosely with their policies. In fact, Lagarde recommends this, saying that the big banks should only go back to “conventional” policies when growth has a solid foundation.Inflation has been above the Bank of England’s 2% rate for some time. However, it has recently dropped below it. Similarly, the United States consumer price index has increased by a measly 1.2% in a year. If we teeter into major deflation, we could see problems in consumption and investment, since borrowing will actually cost more.Now, the above is a bit daunting, but even the harbinger of this news, Christine Lagarde, is optimistic about the global economy overall. We have had a major crisis and the aftermath is visible. However, the worst appears to be over.

The economy is improving slowly, but improving without a doubt. There will be more jobs before deflation becomes an immediate problem. According to Lagarde, the United States can avert another crisis by, “avoid [ing] premature withdrawal of monetary support . . . [and] . . . removing the debt ceiling threat.” Again, there is obvious hope and clear strategies that can be undertaken to improve the risk.

According to Lagarde, the eurozone is on its way to recovery and will do much better if the European Central Bank offers more help. There will be asset quality and stress tests in the near future and, if they are done correctly, they could help. Targeted lending is another way the bank could boost the economy.

As for Japan, a country that has had a deflation problem for some time now, Lagarde believes it needs more strategies for bouncing back. She suggests a temporary stimulus to balance out the necessary consumption tax increase. The country requires reforms that will work for the medium-term.

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